Indiana State University Newsroom

ISU economist: Tax deal sets up 2012 election debate

December 17, 2010

The tax compromise signed into law by President Barack Obama on Friday will set up a larger tax debate in 2012, said a public policy economist at Indiana State University.

Congress earlier this week approved the bill that, among other things, extends for two years the tax cuts passed during President George W. Bush's administration, as well as a 13-month extension of unemployment benefits. With the two-year extension of the tax cuts, they will be debated during the 2012 elections, when Obama is up for re-election, said Robert Guell, an economics professor at ISU.

"This is one of those odd debates in which both sides think they have the winning argument," Guell said, "so both are seemingly happy to have that argument in two years in the next election cycle."

Democrats in Congress could've possibly received just a one-year extension on the tax cuts for people making more than $250,000 per year, but didn't ask for it, Guell said. He added that Democrats also likely could have received a better deal on the estate tax, another element of the bill.

"Both parties think they are not only the right side of the moral argument, but the right side of the political debate," Guell said, "and both may be wrong, but both can't be right."

The compromise came during a lame-duck session of Congress. In January, the House of Representatives, which has been controlled by Democrats since 2007, will return to Republican control; Democrats will remain in control of the Senate and presidency.

Yet while Republicans will have more power once they take control of the House of Representatives, breaks in the estate tax and the Bush era tax cuts were set to expire at the end of the year.

"It doesn't surprise me at all that this compromise happened, because compromise usually happens when the parties view doing nothing as worse than a compromise, and both parties feel that doing nothing is more damaging to them than the compromise is," Guell said.

It would have been "economically disastrous" to have massive tax increases given the state of the economy, and no reasonable likelihood existed that the deficit was going to be brought down in 2011, Guell said.

"The tea party folks' eyes got really wide at the $1.4 trillion deficit," he said, but it "didn't really cause too many economists' eyes to flinch or water up or anything else given the size of the economic problem."

Still, the long-term structural deficit of is a problem for economists, Guell said, which could lead into problems with Social Security and Medicare. He thinks that the country will begin to have the debate about the nation's deficit within the next several years.

Among economists, "it is a consensus that short-term deficits are much less problematic," Guell said, "and that the chronic structural deficits leading into the next decade and beyond are extraordinarily important."

Even with the debate that's likely to come in the next few years, President Obama would be better off to focus on a tax overhaul of his own, which would leave the debate on Bush tax cuts irrelevant, said Guell, who added that Obama "lost really big" on the recent tax cut debate.

"If he changes the subject to a complete restructure of the tax code," Guell said, "he can win the argument, have better policy and make progress on the deficit."